STREET DOGS

FINANCIAL markets have been uncertain of late. The conventional response is to take some sort of action to better position the portfolio for the current environment. This might include trying to move in and out of different asset classes, trying to choose an investment manager who can pick stocks, or getting out of the markets altogether. But some results indicate the best course of action is to take as little action as possible.

Doing nothing in the face of changing markets may seem counterintuitive to most people. Nevertheless, when it comes to investing, inaction is often best. This is not to say that it is best to ignore portfolios entirely. Rather, the correct approach is to be highly disciplined and selective when making any and all portfolio changes, instead of reacting emotionally to short-term market fluctuations.

There is ample evidence to suggest high levels of portfolio activity are unlikely to improve long-term performance. Jeremy Grantham, who runs a multibillion-dollar institutional investment firm also manages his sister’s retirement account, but not through his firm. He estimates he trades his sister’s account once or twice per year and produces returns that are 1-2 percentage points higher than the performance of his company’s funds. Then there’s ING Corporate Leaders Trust, which has outperformed the overall stock market over the past 10 years with no investment manager and a group of stocks descended from a portfolio set up in 1935 and seldom traded.

In theory, taking action and making changes to your portfolio could be effective. It is certainly human nature to want to try. However, even smart investors are not particularly good at it, and the best investors avoid it almost entirely. —